Geographic Scope: United States Geographic Name: Detroit, Michigan Geographic Code: 1USA United States

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225074814

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Chicken Little is alive and seemingly employed as a finance analyst
or reporter for an education interest group. If one relies on newspaper
headlines for education funding information, one might conclude that
America's schools suffer from a perpetual fiscal crisis, every year
perched precariously on the brink of financial ruin, never knowing
whether there will be sufficient funding to continue operating.
Budgetary shortfalls, school district bankruptcies, teacher and
administrator layoffs, hiring and salary freezes, pension system
defaults, shorter school years, ever-larger classes, faculty furloughs,
fewer course electives, reduced field trips, foregone or curtailed
athletics, outdated textbooks, teachers having to make do with fewer
supplies, cuts in school maintenance, and other tales of fiscal woe
inevitably captivate the news media, particularly during the late-spring
and summer budget and appropriations seasons.

Yet somehow, as the budget-planning cycle concludes and schools
open their doors in the late summer and fall, virtually all classrooms
have instructors, teachers receive their paychecks and use their health
plans, athletic teams play, and textbooks are distributed. Regrettably,
this story is seldom accorded the same media attention as are the
prospects of budget reductions and teacher layoffs.

For a variety of reasons, from one year to the next, schools almost
always have more real revenue for each of their enrolled students. For
the past hundred years, with rare and short exceptions and after
controlling for inflation, public schools have had both more money and
more employees per student in each succeeding year. Teacher salaries
have increased more than 42 percent in constant dollars over the past
half century, while educators' working conditions, health plans,
and retirement arrangements have become ever more commodious. Moreover,
school-related revenues and employment levels have increased even when
the economy (as measured by Gross Domestic Product or GDP) turned down,
unlike what typically happens in sectors such as manufacturing and
retail sales, where recessions trigger cut-backs in personnel and
profits.

Now, local school funding is apparently more secure than ever
before. For the first time in history, the federal government has
assumed a dramatic new school-funding role, that of banker of last
resort, providing stopgap revenues to the nation's schools during
economic downturns. The Obama administration's unprecedented
injection of billions in federal funding for schools likely ensures that
education's resource cushion will continue for at least the current
downturn and possibly for much longer. The notion that the federal
government should serve as a fiscal flywheel for schools would have come
as a major surprise to lawmakers even during the 1960s' high point
of federal funding for schools.

A Bigger (and Brighter) Backdrop

It is true that occasionally school districts become insolvent and
states have to step in and take over. California had a string of costly
and highly visible instances in the recent past, with the state having
to elbow locally elected school boards aside and install all-powerful
administrative overseers in large districts such as Oakland and
Richmond. Detroit is the poster child for similar activity in the
Midwest (see sidebar). School district insolvencies are rare and most
often the result of administrative or school board mismanagement and
malfeasance, rather than from the consequence of diminished revenues and
systematic budget cuts.

[FIGURE 1 OMITTED]

Nationally, America's school-district revenues have long been
on an upward trajectory (see Figure 1). Since 1929, per-pupil spending
has declined only four times and significantly only twice, once during
the Great Depression and once in the midst of World War II. There have
been 11 periods during which GDP declined but mean total real per-pupil
revenues still increased. The number of employees, teachers,
administrators, and others has continually increased for four decades,
except for the early 1980s period of declining enrollment and recession.
And pupil-teacher ratios have fallen by almost 50 percent due to
investments in class-size reduction and an increase in the number of
teachers who are not assigned to full classrooms (see Figure 2).

[FIGURE 2 OMITTED]

How Is Education

So Well Protected during Recessions?

Public schools have long been remarkably insulated from economic
downturns. This becomes particularly clear when we compare employment
trends in different economic sectors. Figure 3 displays historical
(1972-2008) employment information in nine sectors: construction,
finance, government, information, manufacturing, professional and
business services, retail trade, transportation, and warehousing.
Employment levels reflect economic conditions and, except for government
(which includes elementary and secondary education), employment levels
fluctuate with the economy and the historical trend is modestly upward.
Contrast this picture with the much steeper upward slopes in education
employment shown in Figure 2.

[FIGURE 3 OMITTED]

Unlike other employment sectors, education is protected from the
direct effects of economic ups and downs by an interlocking and
reciprocally reinforcing set of politically constructed conditions.
Among these conditions are 1) education's privileged legal status
in most state constitutions; 2) schooling's uniquely decentralized
operation and diffuse revenue-generation structure; 3) local political
dynamics and institutions that foster a favorable fiscal environment for
public schools; 4) a multitiered structure for funding schools with
complicated intergovernmental funding incentives and reliance on
inelastic tax sources, such as property taxes at the local level. Almost
no other economic endeavor enjoys such a spectrum of insulating
conditions.

Constitutional Privilege The United States Constitution is silent
regarding education and schooling. This omission, taken in tandem with
the Tenth Amendment's reservation of unspecified powers to states
and the people, and state-level constitutional provisions, renders
education principally a state function. Moreover, state constitutions
explicitly assume responsibility for provision of schooling.

State constitutional education clauses are generally of three
kinds. They assign the legislature a responsibility for provision of an
education system that is 1) "Thorough and Efficient," 2)
"General and Uniform," or 3) the legislature's
"Paramount Duty."

The precise language of the state constitution is not as important
as the explicit specification of the state's responsibility for
providing education. Criminal justice, transportation, recreation,
indigent care, economic development, commercial regulation, and even
public safety are not privileged to the same degree. A state can decide
to pursue or abolish numerous areas of government responsibility, such
as support for prisons, highways, parks, and colleges, or welfare
payments. It cannot decide to abandon its K-12 school system. Indeed,
several states even have constitutional provisions that prevent less
being spent on education in any one year than in a prior year.

Many state courts have made clear that education takes priority
when it comes to appropriating funds. Adequacy cases decided in favor of
plaintiffs in numerous states, such as Campbell County v. Wyoming, have
emphasized that the state has a unique obligation to fund schools at
high levels, even if other parts of the budget must suffer.

Decentralized Operation. No modern nation has an education system
that is more decentralized or multitiered than the United States. The
consequence is that American school systems are buffered structurally
and politically against resource competition with other state and local
governmental services.

Conceived in the colonial period and evolving well into the 21st
century, public education in the United States has relied on 50 distinct
state systems that, in turn, delegate selected dimensions of operational
authority to more than 13,000 local school districts. The majority of
these local districts have property taxing authority; the rest rely on
county or municipal governments to generate their share of local
revenue.

Local school districts are overseen by boards of education. Most of
these, 80 percent, are made up of elected members. The remainder of the
boards are appointed by mayors, city councils, or other elected
authorities. Regardless of membership selection procedures, these boards
place education in a privileged position relative to those publicly
provided services that depend on general governments for resources and
must compete with other services for their share.

Political Protection. General citizen apathy toward school spending
and policy can be partially explained by the costs and effort required
for active political participation. School policy and operational
matters can be complicated. It takes a great deal of personal time to
become informed regarding such issues as racial desegregation, charter
schools, curriculum content, testing, graduation standards, geographic
placement of a new school, and the configuration of attendance
boundaries. These and other education-related issues affect parents and
educators more than they do other citizens, particularly those citizens
who do not have children enrolled in public school.

Hence, school district politics, including those surrounding
funding issues and taxation, tend to be dominated by self-interested
coalitions of parents and school district employees. For these
constituents, the costs of becoming informed and actively participating
in school district decisionmaking are low relative to the benefits to be
gained. Employee-parent coalitions tend to dominate local school-board
elections and ballot measures regarding school funding (see "The
Union Label on the Ballot Box," research, Summer 2006). Their
self-interest and favorable predisposition provide schools with
political protection against budget cuts when the overall economy turns
down.

Several other political elements favor school funding. District
employees, those with the most direct interests in sustaining or
elevating school spending, are frequently well organized politically.
Employee groups can offer sympathetic candidates greater campaign
resources than other school-related constituencies. Union members are
probably the voters most predisposed to turn out at an election and to
vote. These dynamics provide schools and school spending with local
advocates who are politically sophisticated and well resourced for
campaign purposes.

Opponents of increased school spending or higher taxes for schools
can be mobilized and on occasion dominate an election. This was
dramatized in the 1978 enactment of California's famous
tax-limitation provision, Proposition 13. Usually, however, incremental
increases in proposed school budgets represent only a fractional
addition to local property-tax rates. When property owners anticipate
paying only a hundred or so additional dollars in the forthcoming year,
they may be unwilling to make the effort needed to oppose the increase.

There is an additional political dynamic contributing to the
preservation of local school-funding levels. A frequent metric, however
misguided, for measuring school quality is the amount of money a
district spends per pupil annually. Many posh suburbs actively compete
on this dimension, proudly proclaiming their per-pupil-spending status
ranking relative to competitor districts. Citizens, parents, and others
who have purchased homes in such districts perceive the value of their
property to be linked to high spending levels and accordingly acquiesce
to advocates' entreaties for more money.

Finally, in most states, education employee unions have the right
to bargain with school boards and to embed collectively derived
agreements regarding salaries and working conditions into legally
enforceable multiyear contracts. These extended contracts, often
bridging or outlasting economic recessions, act to buffer threatened
revenue reductions.

Multiple Revenue Sources. Schools are highly resource dependent,
but they are not dependent on a single source. The distribution of
revenue-raising responsibility over federal, state, and local
governments contributes to education revenue stability (see Figure 4).

[FIGURE 4 OMITTED]

Three trends of note can be discerned in this graphic. First, one
can see that initially, local funds were the dominant source of district
revenues, with states and the federal government being only minor
partners. In most places, local district and municipal revenue has been
generated through property taxation, and this arrangement has assisted
in insulating schools from economic ups and downs. Property taxes are
relatively inelastic when the economy swings up. It takes assessors two
to three years to capture escalating property values and, thus, to give
school districts the full measure of benefit from economic growth and
housing inflation. However, this same inelasticity protects schools
during economic downturns when property owners continue to pay those
same taxes, even if their income is reduced, as assessors do not reduce
property values in a timely manner.

The second trend began in the post--World War II era, as state
funding supplanted and matched or slightly exceeded local revenues. This
pattern resulted, at least partially, horn the "equal
protection" litigation movement launched in the 1970s, in which
state courts determined that rectifying once-gaping spending
inequalities between districts was the states' responsibility.
While remedies might have left local funding as the principal revenue
source for schools, state legislatures chose instead to provide funding
centrally from state coffers and to reduce the relative contribution of
localities.

Even in the face of the current recession, state governments are
raising taxes to cover deficits. This may actually reflect an additional
explanation for how well schools have done in the past: States are
required to have balanced budgets, so they raise taxes when times arc
tight and then keep the new rates when the money flows again. Local
governments and school districts do not have the luxury of deficit
spending.

Reliance on state funds is a double-edged sword, however. State
revenues dampen interdistrict inequalities but, since they typically
derive from sales and income taxes, these revenues are also more closely
linked to economic fluctuation and more volatile than property tax
receipts. Dependence on state funding also places education in a more
competitive resource arena. Local school boards concern themselves, and
focus their taxing authority, only on education issues. State
legislatures, education's privileged constitutional position
notwithstanding, have to consider a far wider range of services and
responsibilities in deciding who gets what.

The third trend pertains to the federal contribution. In 1965, the
federal government launched its most significant education endeavor when
the Johnson administration initiated the Elementary and Secondary
Education Act (ESEA). Appropriations from this legislation pumped
federal spending all the way up to 8 percent of total school revenues.
The No Child Left Behind Act (NCLB) is the 2001 version of the ESEA.
This statute did not dramatically increase federal funding for
education, at least as a percentage of total revenue. It did, however,
usher in a completely new era of accountability in education.

Prior to 2009, the highest historical rate of federal contribution
to education had been 10 percent. The Obama administration's
economic stimulus plan ($44 billion for schools now flowing under the
American Recovery and Reinvestment Act [ARRA] of 2009) dramatically
alters this trajectory and contributes to a more evenly balanced revenue
portfolio for schools. The federal government is becoming less and less
a junior partner, and more and more an equal partner, in the tripartite
American method of funding schools.

Why the Ever-Present Fiscal Doom?

If school revenues have enjoyed such remarkable stability, why the
persistent appearance of fiscal calamity? One reason is that
school-district budget cycles are imperfectly synchronized with state
and federal legislative appropriations processes. The fiscal year for
state and local governments routinely begins on July 1. It is
increasingly rare for legislative bodies to enact spending bills much in
advance of this date. School districts are legally obligated to have
balanced budgets and cannot balance anticipated expenditures through
deficit financing. As local school boards begin their winter and spring
budget planning, they and their administrative officers perceive state
and federal fiscal uncertainty and publicly discuss, as state
"sunshine" statutes mandate, their contingencies for budget
cutting.

Since some 80 percent of school-district budgets are absorbed in
personnel costs, local school boards, when pressed fiscally, quite
naturally give consideration to personnel cutbacks and salary freezes.
State statutes make it necessary to inform school employees, usually in
April or May, if there are to he layoffs. Sensing financial
vulnerability and needing to comply with personnel notification
deadlines, school districts issue layoff notices and hold mandatory
public hearings, even if the probability of actual personnel layoffs is
slender. Such public threats trigger a media frenzy, alarm employees and
parent advocates, and exacerbate, yet again, the prevailing public
perception that schools are headed for fiscally stringent times.

The likelihood of resource reductions is remote. However, it is a
rare education reporter, teacher who receives a layoff notice (however
unlikely to be acted upon), or parent who was expecting to have the
highly regarded but layoff-vulnerable Ms. Jones for her 3rd-grade child
in the fall, who sees the matter in historical perspective or with
objectivity.

What Has All This Money Produced?

The ever-increasing cost of public education would engender less
controversy if the product had improved apace. The United States expects
much of its schools. Preparation for career, college, and citizenship;
personal health and hygiene knowledge; racial and gender equity; leisure
and aesthetic appreciation; social mobility; scientific sophistication;
safe driving practice; and sex, alcohol, drug, reproductive, and
environmental awareness are all part of the booming, buzzing, and
sometimes antithetical public discourse that assigns purposes to the
nation's schools. Still, there are two fundamental dimensions on
which schools must maximize performance in order to make progress toward
all other desired education outcomes: 1) children learning to read and
2) students completing high school. Viewed longitudinally,
America's schools have not done well on these dimensions.

Reading scores on the National Assessment of Educational Progress
(NAEP) have been level for four decades. Graduation rates, as recently
calculated by economist and Nobel laureate James Heckman, display the
same regrettable pattern as reading scores. For a half century, nearly
one-third of the nation's high-school students have failed to
graduate with their class each year. That average masks much lower
historical rates for black and Hispanic students than for white
students. Many who do not graduate from high school subsequently obtain
high-school equivalency credentials, such as the General Equivalency
Diploma (GEO). Still, more than 1 million adolescents each year have
somehow not been retained by the nation's schools.

Will the Schools' Fiscal Privilege Persist?

If one were to place bets based on past evidence, the odds favor
America's public schools to operate next year with at least as much
and probably with somewhat more money and a larger and (modestly)
better-paid labor force than they had in 2009. The dramatic escalation
of the federal government's revenue contribution, to close to 15
percent of education's national total, almost guarantees that mean
per-pupil revenues will not decline in 2010.

There is no effort here to dispute the reality of the current
recession. State and local tax receipts, heavily dependent on
consumption and income, were down 4.6 percent for the first quarter of
2009 over the prior year. Still, per-pupil revenues will likely continue
their historical upward trajectory. The unprecedented ARRA stimulus
recovery allocation for education only strengthens this prediction.

Although the current economic crisis has several dimensions
previously unseen--the pace at which employment and housing sectors
crumbled, the speed at which credit disappeared, the intensified
economic interdependence of global markets, and the stunning magnitude
of plummeting personal and institutional wealth--the federal
government's monetary and fiscal recovery plans were enacted into
policy with remarkable speed. Congressional willingness to subsidize the
economy was never higher. And the international community coordinated
stimulus spending as never before.

Also, during early April 2009, the U.S., European, and Asian stock
markets seem to have bottomed out and turned up. Job losses, while
continuing, are slowing. Nationwide unemployment, at 9.3 percent as of
this writing, is still lower than at its post-World War II peak of 10
percent in the 1982 recession, and gives no indication of coming close
to catastrophic Great Depression rates. In April 2009, prices of goods
and services were down and consumer confidence unexpectedly climbed,
modestly, upward.

Balancing all these factors leads to the projections in Figure 5,
which provide a bounded estimate of national total operating revenues
per pupil through 2020. These high and low projections, based on 2006-07
dollar spending, are the result of calculating historical rates of least
and greatest growth and applying those rates to create low and high
projections until 2020. Specifically, the low projection, which would
produce $9,519 in per-pupil spending in 2020, is based on an average
growth rate of 0.1 percent, similar to the period from 1991 to 1996. The
high projection, which would produce $13,208 in per-pupil spending in
2020, is based on an average growth rate of 2.45 percent, similar to the
period from 1997 to 2004. (Readers should keep in mind that these
figures are in 2006 dollars and the actual per-pupil dollar amounts in
2020 would be higher.)

[FIGURE 5 OMITTED]

The major assumption here is that the federal government's
stimulus contribution to K-12 schooling will approximate $90 billion.
The $37 billion in the stimulus package that is intended to offset
reduced state and local education revenue in 2009 will cushion what
would otherwise likely have been the first significant per-pupil
spending reduction in 60 years.

A New Fiscal Stability

Whether measured on a per-pupil basis or as a percentage of Gross
Domestic Product, support for public schools is stronger in the United
States than in most other nations. Moreover, this condition has
persisted for many decades. A unique set of constitutional, structural,
financial, and political arrangements ensures that school systems and
professional educators are buffered from revenue losses when the economy
declines. State rules surrounding local school-district budgeting
procedures contribute to the opposite impression, making it appear that
schools are in a perpetual financial crisis.

The 2009 ARRA stimulus package may portend an entirely new source
of fiscal stability for America's schools. When the economy turns
down, the federal government may serve as the major fiscal backstop for
public education.

RELATED ARTICLE: Another Detroit Deficit

A century ago the Detroit Public Schools were among the
nation's leading educational institutions; they now teeter on the
edge of oblivion. Enrollments have dwindled to 93,000, roughly half of
their 2001 level, as parents have moved or enrolled their children in
charter schools. Only 58 percent of enrollees graduate from high school;
only 25 percent of 9th graders graduate four years later. Student
standardized test scores are among the lowest in Michigan. A Council of
Great City Schools report found deficiencies in instruction, data,
accounting-the list goes on.

The district has 100 vacant schools on its property rolls. The FBI
has targeted a school district payroll manager for allegedly embezzling
$400,000. When Detroit school employees were asked to pick up paychecks
in person, 257 checks were never claimed, presumably made out to ghost
employees. A recent audit found staggering waste, from unused vehicles
and electronic equipment to health coverage costs for ineligible
dependents. In 2002, the Detroit Public Schools had a $103.6 million
surplus. Now the district faces a deficit of $259 million and is
contemplating filing for bankruptcy protection, a rare occurrence in the
history of American public education. More than 2,000 layoffs and 29
school closures have done little to narrow the gap. The district is
scheduled to receive $149 million in federal stimulus funds, but only
$11 million of this can go toward reducing the deficit.

James W. Guthrie is professor of public policy and education at
Vanderbilt University and director of the Peabody Center for Education
Policy, where Arthur Peng is research associate.